Advanced Micro Devices, Inc. (AMD) has gained over 80% over the last year, including a 45% improvement this year alone. But just as many were beginning to wonder if AMD stock could keep the run up, shares reversed, falling around 6% in a single day.
Before we zoom in on that decline, let’s rehash what had Advanced Micro Devices climbing so steadily to begin with.
If you zoom out, most metrics for the stock are actually heading in the wrong direction. Sales for the past year have been falling since late 2012 thanks to the decline in the PC industry, with the decline ramping up in mid-2014. Subsequently, AMD went from being profitable to posting losses.
In the last four quarters alone, AMD has lost between 10 and 17 cents per share, including one loss that was 42% wider than Wall Street had expected.
And yet the stock has been chugging higher over the past year, for the most part. What gives? Well, there was room for gains because so much damage has already been done to AMD and expectations were so low. Heck, even after the past year’s recovery, AMD is trading for just 0.9 times sales.
In fact, AMD stock jumped 52% in one day (volatility is clearly an understatement here) following an earning report that still didn’t feature any actual earnings, but that did feature some promising things in the pipeline.
Advanced Micro Devices has shifted its focus to supplying chips to the gaming industry, so investors applauded a large Chinese licensing contract and rumors about processors for three new gaming consoles, likely from the big three — Nintendo Co. (NTDOY), Sony Corp (SNE) and Microsoft Corporation (MSFT).
But the hype around the gaming business just became a double-edged sword for AMD. Shares fell this week because the company released pricing for its graphic chips that power virtual reality software. While VR is huge and could represent a large market opportunity, investors were turned off by what they consider too-low pricing. The chips were priced at $199 vs. a comparable price tag of $399.
While it’s admirable that AMD wants lower prices to make VR technology accessible, it doesn’t serve investors seeking proof that Advanced Micro Devices can claw its way back to profitability.
Lower margins and higher market share sound fine, but it’s still a gamble — and there’s a good chance it will simply drive prices across the board lower, meaning AMD isn’t going to reap the full benefits. Hence, investors second-guessing their recovery bet.
Bottom Line on AMD Stock
If AMD can indeed lead the VR and gaming market — two huge and growing markets, mind you — I believe it can get back to profitability even with lower pricing. But I’m going to need to see some proof of that first.
Right now, despite the stock’s direction, most momentum is in the wrong direction for AMD. The company is slightly discounted when compared to sales, but if investors want to see a path toward profitability, that’s arguably irrelevant.
There are signs that that revenue decline is slowing and profitability could be coming, but in a situation like this, investors are skittish. Wait for more concrete signs before jumping in.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
